Moody’s says it right

EDITORIAL: Finally, it’s taken a key ratings agency to turn the spotlight towards some, by no means all, of the pitfalls on the long road that is the new EFF (Extended Fund Facility).

Moody’s doesn’t doubt that the SLA (Staff-Level Agreement) reached with the IMF will be green-lighted by its executive board, and appreciates that it will “improve Pakistan’s funding prospects”, yet warns that the harsh “upfront conditions” might demand more muscle than a weak government can show; hence pouring cold water over the euphoria of the last few days.

Moody’s makes a very valid point. It doesn’t mention that the government just decided not to create crucial extra fiscal space by taxing the biggest, most protected holy cows, which means the increased burden will fall squarely on the middle- and lower-income groups.

But it does say that those “upfront conditions” – especially structural reforms – will grow harder as the Facility rolls on, and questions whether a fragile coalition government, still struggling for legitimacy months after a very disputed election result, will be able to force them on people already hurting from record inflation and unemployment of the last three years.

Social tensions – which are sure to arise, perhaps even rioting – could well force a rollback of the programme midway; as has happened so, so often in our long history with the Fund. Where would we stand then?

According to the IMF itself, Pakistan’s external financing needs are $21 billion for this fiscal and another $23 billion for 2025-26, while reserves are only $9.4 billion as of now.

These repayments will roll over only and only if we’re on an active IMF programme. If it is cut short – because of social unrest or weak revenue collection (because of the deliberately skewed tax regime) – then the country will most certainly default. It’s as simple as that.

Interestingly, the report seems to have ignored the insurgency that is building and its own steep cost.

Foreign investors and bi- and multi-lateral creditors will offer their sympathies, but not their investments, as people die and insecurity to life and limb persists and risk of their money being sucked into another war-on-terror black hole increases.

So, the only question that really matters right now is whether the government can cajole the people into enduring unprecedented and discriminatory tax misery – largely because it still wants to protect the big sectors with the contacts and connections to stay out of the tax net – long enough for the EFF to run its course and delay default that much longer.

Moody’s, for one, does not seem very optimistic. Neither would millions upon millions of people be when the taxman inflates bills beyond their entire incomes. That is when the government will have to prove its mettle.

How it juggles the economy, the insurgency, and perhaps the most bitter political divide in the country’s history will come into very sharp focus very soon.

So far, its non-seriousness about equitable taxation and inaction on the SOE (state-owned enterprise) front shows, if anything, is that it does not even fully understand the gravity of the situation.

Copyright Business Recorder, 2024